The Bank of Canada slashed its key interest rate by three-quarters of a percentage point Tuesday.

The bank’s overnight rate now stands at 1.5%, a level not seen since 1958.

The operating band for the overnight rate is correspondingly lowered, and the bank rate is now 1.75%.

Bay Street economists had expected the central bank reduce its key policy rate by half a percentage point. But some economists looked for a three-quarter-point cut.

Ahead of the cut, the Canadian dollar opened at US79.47¢, down 0.27 cent.

Responding to the rate cut, all the major Canadian banks said they would lower their prime lending rates by 50 basis points to 3.5%, effective Dec. 10.

In its accompanying statement, the Bank of Canada said “The outlook for the world economy has deteriorated significantly and the global recession will be broader and deeper than previously anticipated.”

The central bank confirmed that the country is in a recession. “While Canada’s economy evolved largely as expected during the summer and early autumn, it is now entering a recession as a result of the weakness in global economic activity. The recent declines in terms of trade, real income growth, and confidence are prompting more cautious behaviour by households and businesses,” the bank said.

“In light of the weakening outlook for growth and inflation, the Bank of Canada lowered its policy interest rate by a total of 75 basis points in October and by an additional 75 basis points today. These monetary policy actions provide timely and significant support to the Canadian economy.”

The Bank of Canada’s next scheduled date for announcing the overnight rate target is Jan. 20, 2009.

According to RBC Economics Research, “today’s message is that the Bank will hold the overnight rate at 1.50%.” But assistant chief economist Dawn Desjardins added that if a more protracted downturn ensues, more rate cuts could be in store.

TD Bank Financial Group economist James Marple agrees that further cuts will be limited, but remain a possibility.

“Given the further deterioration in the outlook for inflation, an additional 50 basis point cut when the Bank of Canada meets again on January 20th is a reasonable expectation,” Marple wrote in response to the rate cut.

A full update of the bank’s outlook for the economy and inflation, including risks to the projection, will be published in the Monetary Policy Report Update on Jan. 22, 2009.

IE